Primary Sector Business

A primary sector business in North Dakota is a certified entity that adds value to a product, process, or service through knowledge or labor, resulting in the creation of new wealth for the state’s economy. This designation serves as a mandatory gateway for specialized tax benefits, most notably allowing qualifying small R&D firms to monetize unused tax credits by selling or transferring them to other taxpayers.

The intersection of primary sector certification and the North Dakota Research and Experimental Expenditure Tax Credit represents a sophisticated pillar of the state’s economic development strategy. Unlike traditional tax incentives that merely reduce current liabilities for profitable entities, the North Dakota framework is specifically engineered to support the lifecycle of high-growth, innovation-based enterprises that may not yet have a tax liability to offset. By formalizing the definition of a “Primary Sector Business” (PSB), the Legislative Assembly has created a filter that ensures state resources are directed toward activities that expand the economic base—bringing in “new wealth” from outside the state—rather than those that simply recirculate existing capital within local markets. This distinction is critical for practitioners to understand, as the qualification process for primary sector status is qualitative and requires a demonstration of value-added activity that satisfies multiple sections of the North Dakota Century Code (N.D.C.C.).

The Statutory Definition and Evolution of the Primary Sector Business

The term “primary sector business” is not a monolith in North Dakota law; rather, it is a definition that has been refined and mirrored across various chapters of the Century Code to ensure consistency in economic policy. The foundational definition, found in N.D.C.C. § 1-01-49, describes a primary sector business as an individual, corporation, limited liability company, partnership, or association certified by the Department of Commerce Division of Economic Development and Finance. This certification confirms that the entity, through the employment of knowledge or labor, adds value to a product, process, or service which results in the creation of new wealth.

Variances in Statutory Language

While the core tenets remain the same, subtle variations exist across different sections of the code, reflecting the specific goals of various incentive programs. For instance, N.D.C.C. § 40-57.1-02, which pertains to tax exemptions for new and expanding businesses, provides a definition centered on the creation of new wealth through value-added activities without explicitly mentioning the Department of Commerce certification in the baseline text, though certification remains a procedural requirement for the exemption. Conversely, N.D.C.C. § 26.1-50-01, relating to the low-risk incentive fund, emphasizes that qualification must be determined by the Department of Commerce, highlighting the department’s role as the state’s economic gatekeeper.

Other sections, such as N.D.C.C. § 10-33-124 (nonprofit development corporations) and § 52-02.1-01 (new jobs training program), incorporate specific exclusions. For example, the new jobs training program definition excludes production agriculture, ensuring that incentives are focused on the processing or technology-heavy aspects of the agricultural chain rather than traditional farming operations. This legal architecture demonstrates a deliberate effort by North Dakota lawmakers to target “exportable” value—activities that generate revenue from national or international customers.

The Three Pillars of Primary Sector Qualification

Pillar	Requirement	Practical Application
Value Addition	Must transform raw materials or ideas into a higher-value output.	Processing raw wheat into flour or developing proprietary software from code.
Knowledge/Labor	The value must stem from intellectual property or physical work.	Engineering specialized parts or conducting scientific experiments.
New Wealth	Must bring revenue into North Dakota from external markets.	Selling a product to a customer in Minnesota or providing an in-state service previously unavailable.

The Concept of New Wealth: The Economic North Star

Central to the primary sector designation is the creation of “new wealth.” The North Dakota Department of Commerce defines new wealth as revenues generated by a business in the state through the sale of products or services to customers outside of North Dakota, or to customers within the state if those products or services were previously unavailable or of limited availability from a North Dakota business.

This definition effectively excludes most retail, hospitality, and service-based businesses that serve a purely local clientele. A restaurant or a local law firm, while essential to the community, generally does not create “new wealth” in the statutory sense because they are largely redistributing existing income from one North Dakotan to another. In contrast, a manufacturing facility in Bismarck that sells heavy equipment to mining companies in Australia is creating new wealth by injecting international capital directly into the North Dakota economy.

The “import substitution” clause—providing products previously unavailable in-state—offers a secondary path for primary sector status. This acknowledges that keeping North Dakota capital within the state by replacing out-of-state imports is economically equivalent to exporting goods. For example, a specialized biotechnology lab that provides diagnostic services previously only available in Rochester, Minnesota, could be certified as a primary sector business because it prevents the flight of capital from the state.

Technical Analysis of the Research and Development Tax Credit

The North Dakota Research and Experimental Expenditure Tax Credit, established under N.D.C.C. § 57-38-30.5, is designed to stimulate innovation by offering a credit against state income tax for qualified research activities conducted within the state. This credit is “federalized,” meaning it largely follows the definitions provided in Section 41 of the Internal Revenue Code (I.R.C.), but with a strict geographical limitation: the research must be done in North Dakota.

Eligibility and the Four-Part Test

To qualify for the credit, a business must engage in research that satisfies the federal “four-part test” as interpreted by the North Dakota Office of State Tax Commissioner.

• Technological in Nature: The research must fundamentally rely on principles of physical or biological science, engineering, or computer science.
• Permitted Purpose: The objective must be to develop a new or improved business component, such as a product, process, software, or technique, intended to improve functionality, performance, or quality.
• Elimination of Uncertainty: The activity must seek to discover information that eliminates technical uncertainty regarding the design, methodology, or capability of a business component.
• Process of Experimentation: The research must involve a systematic process of experimentation, including testing, modeling, simulation, or trial and error.

Calculation Methodologies: Regular vs. ASC

North Dakota allows taxpayers to choose between two methods for calculating the credit, providing flexibility for different business stages.

The Regular Incremental Method:

This method calculates the credit based on the excess of North Dakota qualified research expenses (QREs) over a “base amount”. The base amount is typically a fixed percentage of the taxpayer’s average gross receipts from North Dakota for the prior four years, though for R&D purposes, the base amount cannot be less than 50% of the current year’s QREs.

• 25% of the first $100,000 in excess QREs.
• 8% of any excess over $100,000.

The Alternative Simplified Computation (ASC) Method:

Effective since 2019, the ASC method simplifies the calculation by focusing only on research expenses rather than gross receipts. It uses the average QREs for the three preceding tax years.

• 17.5% of the first $100,000 of excess QREs (excess over 50% of the 3-year average).
• 5.6% of any excess over $100,000.

If the taxpayer had zero QREs in any of the three preceding years, the credit is 7.5% of the first $100,000 and 2.4% of the excess.

The Primary Sector Transfer Mechanism: A Critical Liquidity Tool

The true power of the primary sector business designation within the R&D credit context is found in the transferability provision. Under N.D.C.C. § 57-38-30.5, a “qualified research and development company” may elect to sell, transfer, or assign up to $100,000 of its unused tax credit to another taxpayer.

Eligibility for Credit Transfer

This transfer option is not available to all companies. It is specifically tailored for emerging primary sector firms that are heavy on innovation but light on revenue. To be certified as a qualified research and development company entitled to transfer credits, a firm must meet four stringent requirements:

• Primary Sector Status: It must be certified as a primary sector business by the Department of Commerce.
• Revenue Threshold: It must have annual gross revenues of less than $750,000.
• Innovation History: It must have conducted qualified research in North Dakota for the first time after December 31, 2006.
• Special Certification: It must apply for and receive certification as a “Research and Development Company Qualified to Sell, Transfer or Assign Unused Tax Credit” (SFN 58638).

This mechanism creates a secondary market for tax credits, allowing a pre-revenue startup—such as a developer of Unmanned Aircraft Systems (UAS) in Grand Forks—to sell its $100,000 credit to a profitable North Dakota corporation. The startup receives immediate non-dilutive capital, while the purchasing corporation receives a dollar-for-dollar reduction in its state income tax liability, often at a slight discount to the credit’s face value.

Local State Revenue Office Guidance and Compliance

The administration of these incentives requires coordination with the North Dakota Office of State Tax Commissioner and the Department of Commerce. Detailed guidance from these offices outlines the specific forms and evidentiary standards required for compliance.

Step-by-Step Certification Guidance: SFN 52998

To obtain Primary Sector Certification, a business must complete Form SFN 52998, which is reviewed by the Division of Economic Development and Finance. The application is organized into several critical steps:

• Value Added Determination: The applicant must describe how it adds value to its product. Examples provided by the state include transforming raw materials into higher-value goods (soybeans into soybean meal) or employing knowledge to create specialized software.
• Sales and Market Analysis: The business must report its annual gross sales generated through its North Dakota facility and provide a percentage breakdown of where its products are sold (North Dakota, Regional, National, International).
• Value Stream Verification: Suppliers must list up to four North Dakota companies that purchase their goods for further processing and ultimate sale outside the state.
• Production Agriculture Review: If the business involves agriculture, it must specify its management structure (farm operator vs. employees) and location (on-farm vs. investor-owned feedlot) to ensure it is not excluded under the “production agriculture” rule.

Applications are typically processed within two weeks, and certification is valid for four years.

Reporting and Filing Requirements

The state revenue office provides specific instructions for different entity types to claim or transfer the credit:

• Corporate Filers: Claim the credit on Form 40, Schedule TC, Line 6 (generated) or Line 7 (purchased).
• Individual Filers: Use Schedule ND-1TC, Line 9a. If selling a credit, individuals must also complete Schedule ND-1CS to calculate the tax on the sale proceeds.
• Passthrough Entities: S-Corps and Partnerships determine the credit at the entity level and allocate it to owners in proportion to their interest. Owners then claim the credit on their respective returns.
• Transfer Documentation: Any sale of credits must be reported jointly by the seller and buyer using Form CTS (Credit Transfer Statement) within 30 days of the transfer.

Audit and Record-Keeping Best Practices

The Tax Commissioner maintains the right to audit claims for a period of four years. Taxpayers are advised to maintain robust documentation, including:

• Project-level time tracking for R&D employees.
• Detailed accounting for materials and supplies used in North Dakota-based research.
• A Property Tax Clearance Record, certifying that the taxpayer is in good standing with all North Dakota counties where they hold at least a 50% interest in real property.

Statistical Overview and Economic Impact

The usage of the R&D tax credit has shown significant growth since the 2007 restructuring that introduced the transferability option for primary sector businesses.

Historical Utilization Statistics (2007-2014)

Tax Year	Individual Claims	Individual Returns	Corporate Claims	Corporate Returns
2007	$530,888	75	$1,944,382	15
2008	$867,722	152	$1,694,636	13
2009	$856,534	132	$3,502,244	16
2010	$1,247,417	150	$3,642,723	12
2011	$1,383,298	173	$5,381,168	19
2012	$2,256,413	187	$6,570,148	16
2013	$2,211,488	148	$2,547,115	20
2014	$949,391	133	(Confidential)	<5

These statistics highlight that while a larger volume of individual taxpayers (often passthrough owners) claim the credit, corporate claims often involve much larger dollar amounts per return. The 2012 peak in corporate claims coincides with major technological expansions in the energy and manufacturing sectors, which are core “Primary Sector” industries for North Dakota.

Comparative State Frameworks

North Dakota’s R&D credit is often compared to neighboring and high-innovation states to measure competitiveness.

State	R&D Credit Rate	Transferable?	Key Advantage
North Dakota	25% (First $100k)	Yes (for PSBs)	High initial rate; Liquidity for startups.
Minnesota	10% (First $2M)	No	Higher cap for large corporations.
California	15% (Excess)	No	Large ecosystem, but no liquidity for pre-revenue firms.
Florida	10% (Excess)	No	Simplified calculation, lower rate.

North Dakota’s structure is uniquely optimized for “scaling from within,” offering a higher percentage (25%) on the first tier of research spending than almost any other state, coupled with a mechanism to turn that credit into cash.

Case Study: “Ag-UAS North” Drone Systems

To illustrate the application of these rules, consider a hypothetical startup, “Ag-UAS North,” based in Grand Forks.

Scenario A: Foundation and Certification

Founded in 2024, Ag-UAS North develops autonomous drones that use infrared sensors to detect pest infestations in sugar beet fields. Because the company will sell these drones primarily to co-ops in Minnesota and North Dakota, and because the technology was previously unavailable, the company applies for and receives Primary Sector Business Certification via Form SFN 52998.

Scenario B: Research and Credit Calculation

In its first year, the company incurs $250,000 in qualified research expenses (mostly engineer salaries). Using the regular method and a base amount of $125,000 (the 50% minimum):

• Excess QRE: $125,000.
• Credit Calculation: (25% of first $100k) + (8% of remaining $25k) = $25,000 + $2,000 = $27,000 total credit.

Scenario C: The Transfer

Ag-UAS North has zero revenue in year one and cannot use the credit. However, since they are a certified primary sector business with gross revenue under $750,000, they obtain SFN 58638 certification. They sell the $27,000 credit to a profitable North Dakota construction company for $22,000. Ag-UAS North gains immediate cash for payroll, while the construction company reduces its state tax by $27,000 at a cost of only $22,000. Both file Form CTS to legalize the transaction.

Synergy with Other Primary Sector Incentives

Qualifying as a primary sector business unlocks more than just the R&D transfer; it enables a holistic suite of incentives that support a company as it matures from a research project into a manufacturing powerhouse.

Automation Tax Credit (Line 22, Schedule TC)

Once an R&D company like Ag-UAS North is ready to mass-produce its drones, it can apply for the Automation Tax Credit. This allows for a credit of up to 15% of the cost of machinery or equipment used to automate manufacturing processes. Crucially, the business must be certified as a primary sector business at two points: when it takes title to the equipment and when it applies for the credit.

New and Expanding Business Income Tax Exemption

New corporations that qualify as primary sector businesses can apply for a 100% corporate income tax exemption for up to five years. This is particularly valuable for research firms that suddenly become profitable due to a major contract or product launch.

Legislative Oversight and Future Trends

North Dakota maintains a rigorous oversight process for these incentives. Every six years, the Legislative Management’s interim committee reviews each incentive to ensure it still serves its public purpose and remains competitive.

The Pew Evaluation Ratings

North Dakota has received high marks from the Pew Charitable Trusts for its systematic review of tax expenditures. The state uses economic modeling software, provided by the Bank of North Dakota, to evaluate the “dynamic economic impact” of the R&D credit, measuring how it contributes to statewide GDP and job diversification.

Emerging Target Industries

As of 2024-2025, the Department of Commerce has identified five targeted industries for primary sector growth:

• Advanced Manufacturing: 6.71% of Gross State Product.
• Autonomous Systems: North Dakota is a global leader in UAS testing.
• Energy: The state’s largest industry, focusing on carbon neutrality and extraction technology.
• Technology: Rapidly diversifying via innovation-based software firms.
• Value-Added Agriculture: Moving beyond production to processing and biotechnology.

Final Thoughts: Strategic Recommendations for Business Operators

The North Dakota primary sector business certification is more than a administrative hurdle; it is a foundational requirement for any company seeking to maximize its return on innovation. By integrating the R&D tax credit with the transferability options afforded to PSBs, the state has created an environment where technical breakthroughs can be directly converted into operational capital.

Business owners and tax professionals should prioritize the certification process early in the corporate lifecycle. The ability to carry back credits for three years and forward for fifteen provides long-term flexibility, but the “Qualified R&D Company” transfer option provides the immediate liquidity often needed by startups. As North Dakota continues to invest in autonomous systems and advanced manufacturing, the primary sector designation will remain the primary vehicle for delivering state-sponsored growth and ensuring that “new wealth” continues to flow into the state’s expanding economy. Success in this domain requires a thorough understanding of N.D.C.C. § 57-38-30.5 and a disciplined approach to the administrative requirements of the Department of Commerce and the Office of State Tax Commissioner.